For the U.S. institutional asset management industry that is already dealing with significant change, including the decline of traditional defined benefit (DB) pension plans to name just one, the election of Donald Trump is likely to create further disarray. First and foremost, there is great uncertainty as to his support – or lack thereof – for the Department of Labor’s fiduciary rule, over which the wealth management industry is divided.
Add this unknown to the impact on the financial services industry from changing demographics, new technology, consumer demands and a Trump presidency and we have a situation that is likely to shake traditional buy-side and less-nimble sell-side firms to their core.
Since the passage of the ERISA legislation in 1974, long-only asset management firms have thrived in the DB arena, but those pension plans, both corporate and multi-employer plans, have been rapidly disappearing from the private sector in the U.S. and great stresses are forming for DB plans within the public domain, as well.
Furthermore, as plan sponsors navigated the challenging markets during the last 15-plus years, they and their consultants have shifted considerable assets to alternative investment products managed by hedge funds and private equity firms, further reducing the role of traditional asset managers.
We have witnessed the number of DB plans fall from nearly 150,000 in the mid 1980s to roughly 23,000 plans today, according to the Department of Labor. The dramatic shift from DB plans to defined contribution (DC) plans has and will continue to impact opportunities for employment within these traditional asset management firms.
This trend is not only impacting those in the asset management community, but also investment consultants, actuaries and custodians that support defined benefit clients too. In addition, their treasury staff is being impacted.
Meanwhile, everyone is waiting with baited breath to see whether Trump with follow through on campaign promises such as rolling back the Dodd-Frank Act.
Shouldn’t this movement from DB to DC provide new opportunities for institutional asset managers and alternative managers? In some cases, yes, but for a majority of these firms it will prove nearly impossible, as they lack the infrastructure to compete with the major mutual fund companies such as Vanguard, Fidelity and BlackRock, which continue to dominate this space. Furthermore, traditional investment consultants, custodians and pension actuaries have little role within DC plans.
It will be interesting to witness what transpires within the large mutual fund companies, as Trump’s begins making decisions about financial services regulation and DC plans begin to consider a switch from ’40 Act funds to exchange-traded funds (ETFs), which firms provide at a significant cost reduction.
If this trend accelerates, we could see a huge shift in assets from traditional mutual fund companies to the providers of ETFs, including State Street, Blackrock, and Vanguard (a survivor either way), which currently handle more than 80% of all the ETF assets.
The ongoing shift from mutual funds (mostly actively managed) to ETFs (mostly passively managed) is negatively impacting employment opportunities for front-office personnel, including portfolio managers and research analysts, and to a certain extent product managers and specialists that represent and promote these investment teams to clients and prospects.
However, the shift from DB to DC has created a greater need for financial advisers for the Baby Boomer generation and for the generations to come. Retirees from DB plans customarily receive a monthly check reducing the need for financial advice.
On the other hand, those retiring from a DC plan often take lump-sum distributions that require the individual to either manage their distributions themselves or seek assistance from a financial intermediary. The greater use of DC plans has lead to tremendous employment opportunities for a new generation of financial advisers.
But is this trend about to be upended? How will Trump decide to play the fiduciary rule and what some consider to be a retirement crisis in this country?
Advances in technology driven by fintech startups and robo-advisers and potential legislative changes to the DOL’s fiduciary rule (scheduled to be enacted in April 2017), may short-circuit the demand for financial advisers. Compensation structures have begun to be impacted, as there is a significant move away from commissions to fee-for-service relationships.
In addition, there have been significant corporate developments in anticipation of the implementation, including Merrill Lynch’s announcement that they would stop offering new, advised commission-based individual retirement accounts (IRAs) starting next year.
With the demise of DB plans and the greater use of robo-advisers to assist rollover and IRA clients, there will be further consolidation in the asset management industry, which translates into fewer jobs in the long-term.
Perhaps President-elect Trump will elect to kick the DOL fiduciary rule down the road a bit or remove its teeth, but it has gathered far too momentum already to for it to be totally killed, and I believe that the benefits to individual investors likely outweigh the potential negatives from this legislation, such as some firms pulling back from offering service to average and even mass-affluent investors, focusing only on high-net-worth clientele.
With all the uncertainty surrounding what the incoming Trump administration might do, stay tuned for unfolding developments. He is a wild card – asset management and wealth management professionals are holding their breath anticipating what he might do along with the rest of the country and the world. However, many of the trends mentioned above will probably continue regardless of how Trump handles financial services regulation.
Russell Kamp is the founder and managing partner of Kamp Consulting Solutions, the former CEO of Invessco Quantitative Solutions and the ex-director of asset management at Two Sigma Investments.
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